Alset Co. pays 40% in corporate taxes and is financed by the common stock with N = 10, 000 shares outstanding trading at $22.50 per share and by $375K of the risky perpetual debt. Alset has only assets-in-place generating $15 of EBIT per share in perpetuity and does not grow. Let EPS stand for earnings per share, E for equity, and D for debt. (i) Market Sharpe Ratio is equal to 0.4. If the efficient portfolio with βp = 0.8 and volatility, σp, equal to 0.2, has a return of 13%, calculate the risk free rate, rf , and market risk premium, rM − rf .

Alset Co. pays 40% in corporate taxes and is financed by the common stock with N = 10, 000 shares outstanding trading at $22.50 per share and by $375K of the risky perpetual debt. Alset has only assets-in-place generating $15 of EBIT per share in perpetuity and does not grow. Let EPS stand for earnings per share, E for equity, and D for debt. (i) Market Sharpe Ratio is equal to 0.4. If the efficient portfolio with βp = 0.8 and volatility, σp, equal to 0.2, has a return of 13%, calculate the risk free rate, rf , and market risk premium, rM − rf .

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 8P

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